Part II: Tenant's Perspective – Exclusive Use Provisions: The Devil is in the Details

Otten Johnson AlertSeptember 2014

Last month's alert addressed issues that landlords may want to consider when negotiating an exclusive use clause in a retail lease; this month's alert addresses tenants' considerations. A tenant typically wants an exclusive use clause in its lease to protect its business from competition from other tenants in the shopping center. A few key considerations when negotiating an exclusive use provision from the tenant's perspective include the following:

• A tenant may be inclined to define the exclusive use as broadly as possible. However, the landlord will likely want to limit the breadth of the definition to preserve the landlord's flexibility in entering into future leases at the shopping center. A tenant should carefully consider the impact of carve-outs proposed by the landlord. A narrower definition of the exclusive use that is tailored to the tenant's primary business may be more effective than a broader definition coupled with carve-outs.

• A tenant should seek to define the shopping center as broadly as possible and should seek to include portions of the shopping center owned by affiliates of the landlord as well as expansions of the shopping center by the landlord. In certain circumstances, a tenant should also negotiate a right to record a memorandum of the lease to document the exclusive use and its applicability to the subject portions of the shopping center.

• A tenant should request specific remedies in the event of a violation as opposed to merely a breach of contract claim under the lease. Such remedies should include (a) a credit against rent as liquidated damages (and, depending on the tenant’s leverage, a termination right if the violation continues for a specified time), (b) specific performance, or (c) both. Liquidated damages in the form of a rent credit have the benefit of providing a prompt remedy (which may spur the landlord into taking swift action against the violating party) and providing actual compensation to the tenant as opposed to requiring the tenant to bring a claim for lost profits, which can be difficult to prove.

Our Real Estate practice group has extensive experience representing business and real estate clients. For more information on this alert or for help evaluating your current situation, contact any of the attorneys in the Real Estate practice group (click here).